Major concessions deal undermined by bad guesses, secrecy
“Ladies and gentlemen, this is a historic agreement,” Gov. Dannel P. Malloy told the crowd assembled in the dark-paneled Old Judiciary Room of the state Capitol.
Six months after insisting upon $2 billion in concessions from the state’s 45,000 workers, Malloy announced on Aug. 18, 2011, that unions had approved something worth more than $1.6 billion in the short-term. The deal, he pledged, would dramatically enhance state government’s finances for decades to come.
“It represents the most fundamental restructuring of the relationship between state government and state workers that has ever occurred in the state of Connecticut,” the governor said.
But there was even more riding on that deal than the state’s present and future finances.
Politically, it was crucial step for a governor who had just asked voters to accept the largest tax increase in state history. Malloy could say workers not only would be giving back, but doing so far more generously than they had for any of his predecessors.
Malloy also grabbed the national spotlight, claiming in television appearances that he had carved out a successful alternative to the harsh austerity path so many other states’ governors had traveled. And along the way, nearly 5,000 layoffs had been averted.
Fiscally, the deal was nearly as important.
The average annual savings of $800 million would cover more than one-fifth of the $3.7 billion shortfall Malloy had to close in his first budget.
And the $21 billion in savings the governor pledged his deal would provide over the next two decades offered a vision of hope to a state whose financial picture is mired in debt.
But the deal didn’t deliver exactly as planned and from the start was shrouded in an air of secrecy that Malloy’s critics quickly jumped on as a stark contradiction to his campaign pledge of a transparent and accountable government.
While no government agency has calculated precisely how much each concession saved, the administration’s own numbers show the package fell nearly 30 percent shy of its savings target by its second year — a $250 million gap.
More importantly, nonpartisan legislative analysts repeatedly acknowledged their inability to assess the deal, with the administration unable — or unwilling — to share the necessary information.
A host of uncertainties arose around several components whose details were available, including savings from pensions and a new employee wellness program.
In other instances, the administration credited the concessions for savings that had nothing to do with the givebacks.
And when Malloy proposed his next budget, six months after union ratification, expectations for overall savings had been downgraded by about 30 percent, a gap that contributes to the $1.2 billion budget shortfall the governor faces in the coming fiscal year.
Breaking down the deal
“This has become the pattern with this governor,” said House Minority Leader Lawrence Cafero, R-Norwalk, who is weighing a 2014 gubernatorial bid. “He says if you take this medicine, all of these great things will happen. But he never documents or backs it up.”
“The truth of the matter is it was an appropriate and necessary concessions package,” said Senate President Pro Tem Donald E. Williams Jr., D-Brooklyn, who said a deal of this scope could never please everyone. And while some Republicans argue it didn’t save enough, some in labor felt it demanded too much.
Williams added that Malloy was vital to the deal’s success. “We had a governor who was engaged,” he said. “As a Democrat he had a working relationship with labor that previous Republican governors lacked.”
The state employees’ concessions agreement had several components, including:
- A two-year wage freeze in exchange for four years of protection from layoffs;
- A requirement that all workers forfeit 3 percent of their annual pay to help cover their retirement health care;
- A $100 per month premium increase and a higher deductible for all workers refusing to participate in a wellness program that required annual physicals and other screenings;
- Increased prescription drug and emergency room co-payments;
- New limits on pension calculations, an increase in the retirement age and a stiffer financial penalty for early retirement;
- An optional hybrid pension for higher education;
- Labor-management panels charged with finding technological and other efficiencies worth $130 million to $140 million a year.
The deal was supposed to save $701 million in 2011-12, though many lawmakers acknowledged the administration was handicapped in its effort to hit that target. Unions had rejected the package in mid-June, and the fiscal year already was 1½ months old when the second vote brought ratification in mid-August.
The big test would come in the 2012-13 fiscal year, when the projected savings was $901 million.
But when Malloy proposed that budget in February 2012, and when lawmakers adopted it three months later, the $901 million in concessions savings had decreased to $648 million in actual spending reductions spread across agency budgets.
Why did it shrink by almost $253 million? That is not entirely clear.
Details remain hidden
The ink was still wet on a tentative deal that unions hadn’t even voted on when lawmakers got their first hint it would be hard to analyze.
Nonpartisan legislative analysts reported on June 4, 2011, that they could vouch for less than 40 percent of the promised initial savings because of unanswered questions or insufficient data.
The Office of Fiscal Analysis had the most trouble assessing pension and health changes, or the efficiency savings targets.
“Please note that at this time we are unable to determine or verify the levels that are contained in these estimates in many cases,” OFA Director Alan Calandro wrote.
That wasn’t the last time the nonpartisan office had an information roadblock with the Malloy administration.
Once the administration had downgraded the concessions savings by about 30 percent, OFA wrote to the governor’s budget office in February 2012 seeking more details.
Wage freeze estimates were relatively straightforward, worth a little less than half of the revised, $648 million savings built into this year’s budget.
But how much of the rest came from retirements, pension and health care changes, and worker efficiency ideas?
The administration had reduced department budgets to reflect the concessions savings, but those reductions — or “holdbacks” in budget lingo — weren’t broken down to reflect the different concessions.
“The agencies would not necessarily be aware of the savings relative to any particular component of your request,” Malloy’s budget chief, Benjamin Barnes, wrote to legislative analysts.
Well, if the agencies can’t break down the savings, legislative analysts asked, how about the governor’s budget office?
“The holdbacks that were implemented to achieve the savings don’t fall neatly into the categories contained in your request,” Barnes wrote, adding, “I certainly appreciate that some legislators may be dissatisfied” with this approach.
The administration did track savings generally in the categories of wages, fringe benefits and “other,” a level of detail that drew concerns not only from Republican legislators, but from nonpartisan analysts as well.
“The more important concern for me … is the implication that your letter has for other OFA information needs in the future,” Calandro wrote to Barnes. “Agencies are required by state law to provide us with information when it is requested. Without information, OFA will be severely impeded in its statutory responsibilities.”
So what is known about concessions savings?
If the wage freeze provided nearly half of the $648 million in spending reductions built into the current budget, what role might the other components have played?
Originally expected to save $65 million, concessions-induced retirements may have been the saving grace of the Malloy plan.
The governor kept his pledge not to pay financial incentives to encourage well-compensated, veteran workers to retire.
A 2009 concessions package negotiated by Gov. M. Jodi Rell had drawn considerable criticism for paying retirement incentives and raiding the pension fund. That deal, which also featured a one-year wage freeze and a small increase in worker health care costs, saved about $300 million per year from all concessions combined.
But while Malloy refused to pay senior workers to retire, he never said anything about discouraging them from staying on the job.
The concessions deal ordered several new pension restrictions aimed at all who retired after Oct. 1, 2011.
The result was an unprecedented exodus.
More than 2,600 state workers retired during the first three-quarters of 2011, about 2½ times the number recorded at that point in the previous year.
Though the administration has noted it’s impossible to guess exactly how many people retired just to avoid the concessions changes, Barnes has said that it likely produced well more than the original $65 million per year savings estimate.
Malloy’s Republican critics say the retirements, along with the wage freeze, produced the bulk of the $648 million total savings built into the current budget.
But state union leaders say a true price tag can’t be placed on how Malloy effectively downsized government.
By not imposing layoffs, “we’ve kept thousands (more) public-sector workers employed, paying taxes, spending money in their communities,” said Larry Dorman, spokesman for Council 4 of the American Federation of State, County and Municipal Employees.
“State workers have been a major factor in helping to stabilize the state budget in ways that are positive for the Connecticut economy,” said Hartford attorney Daniel Livingston, chief negotiator for the state employee unions.
Changes in health care were supposed to save $203.4 million this year.
The administration had assumed that half of all workers would elect not to join and would pay higher premiums and deductibles that would save the state $120.5 million.
According to Comptroller Kevin P. Lembo’s office, only about 1 percent of workers chose not to join.
This year, that means a savings of less than $815,000 from premium hikes. If all workers outside the wellness plan also pay the full $350 deductible, that represents another $237,650.
Employee health care costs are down $130 million this year, according to the comptroller. But that number stems largely from the state workforce shrinking by more than 2,000 full-time positions in the first year of the concessions deal.
The health care savings is particularly hard to read given that, according to nonpartisan legislative analysts, more than $45 million in savings attributed to the deal had nothing to do with it.
The administration expects to save $12 million this year by replacing expensive brand-name drugs with less costly generics as the former come off patent.
Another $33 million in pharmaceutical and medical service costs is saved through changes negotiated by the comptroller before the deal was enacted.
According to OFA, though savings from renegotiations and the generic drugs were attributed to the concessions deal, both would have happened anyway.
New limits on pensions were supposed to save $183 million this year while the state’s actual contributions will shrink by about $20 million.
But, again, a simple comparison is unfair.
On one hand, Malloy and the legislature voluntarily agreed to dramatically boost pension contributions one year after the deal took effect, and that ate up much of the savings.
And the state’s pension actuaries also noted that the surge in retirements somewhat weakened the pension fund. That’s because each retirement means a worker not only has stopped paying into the fund, but also has begun drawing cash benefits from it. And when this happens in large numbers, the state must contribute more.
The biggest question mark on the pension givebacks involves how much they will save over the long haul.
Legislative analysts reported last year that the pension changes would provide only about one-third of the $4.8 billion savings the administration projected would occur over the next two decades.
Throughout the 2010 gubernatorial campaign, union leaders had argued that no concessions were necessary to balance the state budget — if only officials would listen to workers’ cost-saving ideas.
Malloy promised during the campaign that he would listen, and the concessions package created a labor-management technology panel to save $40 million per year, and a more general panel to save $90 million annually.
The latter was dubbed the “suggestion box” by Cafero, who called the savings associated with both groups “the hoax of the concessions deal.”
Legislative analysts reported early on that they couldn’t determine the rationale used to craft the savings targets.
And in late October 2011, two months after the concessions had been ratified, The Mirror reported that the chief labor-management efficiency panel hadn’t met.
The groups have drawn further criticism since the administration hasn’t produced reports of any specific efficiency savings.
But Livingston said labor and management have been meeting — albeit informally — and are making a difference.
“We are trying to empower front-line workers,” he said. “Ideas are presented all the time now.”
Both Livingston and Barnes said the unions and the administration could have done more to document their efficiency efforts.
“If it’s about providing evidence, you have a point,” Livingston said. “More attention should have been paid.”
“I do believe that the efficiency program, along with several of the other (concessions) will be more successful in the future,” Barnes said, adding tht state government still can become more effective and efficient. “We now have a process for labor and management to work more collectively and there’s more we can do.”
The ripple effects of the concessions deal — and its shortcomings — are felt today.
According to the administration, the cost of maintaining current services and programs next year is $616 million higher than Malloy officials had anticipated two years ago — another important factor behind the $1.2 billion shortfall projected for the next budget.
The $253 million difference between expected and achieved concessions savings alone represents more than 20 percent of that shortfall.
In Part III, The Mirror analyzes how Governor Malloy stepped away from several of the fiscal principles he campaigned on. The governor has been trying to postpone dealing with much of the lingering deficit he inherited until after the 2014 gubernatorial election. What political and fiscal decisions limited the governor’s options, and what is the cost of waiting another two years to resolve the budget crisis of 2011?
Part I, “Promises, gimmicks and a historic shortfall” is available here.
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